The crisis in Ukraine has dominated the media space for weeks now, with a special focus on potential energy supply disruptions should the invasion scenario the U.S. and Western Europe have been talking about since October materialize.
As it became clear early on Thursday morning, the fears that Russia could attack Ukraine were not unfounded.
Vladimir Putin's order to deploy troops in the two eastern breakaway regions of Lugansk and Donetsk had already pushed Brent and West Texas Intermediate higher. On Thursday morning after reports of Russia's attack, all benchmarks rose again, with Brent reaching more than $104 per barrel and WTI briefly breaking $100.
Now, more than ever, there are concerns about oil and gas supply from one of the world's top producers.
Some have compared the situation with the 1973 Yom Kippur war between Israel and a coalition of Arab states. The war led to the Arab oil embargo for the Western world, which led to a sharp and shockingly high rise in prices compared to which this week's $104 for Brent couldn't even compare. In 1973, oil prices practically quadrupled over a few months. This week, they continued on an already established path— a path that, until today, had little to do with Russia.
A Reuters columnist, George Hay, wrote in a column earlier this week that demand for oil was so strong that prices would have to go further still to start affecting demand in any significant way. Just how high prices would need to go we have yet to see. But he also wrote that this was unlikely to happen because OPEC+ would step in to help.
But an OPEC+ rescue is now looking less likely.
"The oil market is artificially tight. OPEC+ is pumping around 3 million barrels a day less than it could, and most of that spare capacity is held by Saudi Arabia and the United Arab Emirates," Hay wrote. "Both would probably respond to any plea by U.S. President Joe Biden to increase supply to ward off destabilising price spikes."
It was an interesting supposition in light of what OPEC, led by Saudi Arabia and with the UAE its staunch ally, has been doing over the past year. There have been numerous calls from President Biden for OPEC to open the taps. These calls were followed by demands and threats to open the U.S. strategic petroleum reserve if OPEC refused to play ball. OPEC refused to play ball. Biden opened the SPR. Prices did not fall consistently. Why should it be any different now?
The latest signs from OPEC are not exactly encouraging.
Officials in several OPEC producers said on Thursday that there was no immediate need to produce more—even though Brent has surpassed the $100 mark, calling the situation "complicated and volatile."
Both the energy minister of Saudi Arabia and his counterpart from the United Arab Emirates spoke recently to the media, signaling they had no intention to change anything about the OPEC+ pact and the schedule of adding 400,000 bpd to the monthly total production.
"Caution, a word that I know some people hate me for, but... I will continue being cautious and (mindful of) the need to retain flexibility in our strategy and adopt a long-term perspective," Saudi Arabia's Prince Abdulaziz bin Salman said earlier this week.
"I think our plan has been working, and I don't believe that the market is hugely under-supplied currently. It's the other factors that are outside our hands which are impacting the market," his Emirati colleague Suhail al Mazrouei said.
Two other OPEC members also made recent comments on oil supply and the chances of additional production boosts, and these comments were along the same lines.
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"The market will have more and more oil," Iraqi oil minister Ihsan Abdul Jabbar Ismail told Bloomberg also this week. "We will not create any growth to the commercial storage. We will secure all the demand by making the required supply."
"We won't do anything extraordinary at this time because we are expecting a lot of production" from non-OPEC producers, Nigeria's oil minister, Timipre Silva said. There is "no need at all to bring on more barrels than the current plan."
Whatever happens in Ukraine, it does not seem to be sitting on the top of OPEC ministers' minds. To them, the global oil market is not in a deficit, and they are doing fine with output additions. This stance is in contrast with the stance of consuming countries—and the International Energy Agency—which makes for truly interesting times in the oil world.
By Irina Slav for Oilprice.com
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No way any of this is good for oil.
The rise in oil prices yesterday is temporary and will soon return to the level that was prevailing before the invasion. The reason is that the invasion hasn’t so far caused any disruption to oil supplies. Moreover, the United States and the European Union (EU) haven’t imposed any sanctions on Russia’s oil and gas exports.
OPEC+ will indeed be happy with $100 oil since the majority of its members need an oil price approaching this level to balance their budgets.
Moreover, a fair Brent crude oil price ranges from $100-$110 a barrel. Such a price is good for the global economy as it invigorates the three chunks that make up the economy: (i) global investments; (ii) the global oil industry and (iii) the economies of the oil-producing countries.
If crude oil prices rise beyond the tolerance level of the global economy, it will let us know in no uncertain terms. In fact the global economy did exactly that in 2008 and 2014.
When crude oil prices rise beyond the tolerance level of the global economy, it leads to a gradual destruction of demand which forces prices down to a level acceptable to the global economy and consumers.
Therefore, OPEC+ sees no need yet to intervene and raise its oil production beyond what has been already agreed.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London